How Payroll Works

You are an employer of employees according to the Canadian Income Tax Act because you control how and when your employee will work, you determine the amount of pay and you determine what the employee will do (click here for more information).

Because you are in an employer/employee relationship, you are obligated to take source deductions off the amounts you pay to your employees. After you have made the deductions, you must send these deductions, plus your share as the employer, to the Canada Revenue Agency monthly. Once a year, you are also responsible for reporting the employee's income and deductions on a T4.

Hiring an employee

When you hire an employee, you must:

• get his or her Social Insurance Number (SIN) (along with all their contact information); and
• have him/her complete Form TD1 and TD1ON, Personal Tax Credits Return; these will help you and your bookkeeper determine the appropriate deductions from the employee’s paycheque.

Calculating deductions

You must calculate the Canada Pension Plan contributions, Employment Insurance premiums, and income tax deductions based on the amounts you pay your employees. You also must calculate your share of CPP and EI. The Canada Revenue Agency has a great Payroll Deductions Online Calculator to help with this.

Canada Pension Plan (CPP)

You must deduct CPP contributions from an employee's remuneration if that employee:

• is 18 years or older, but younger than 70;
• is in pensionable employment during the year (First Nations people or seniors already receiving CPP are the only people who may not be receiving “pensionable earning” from you); and
• does not receive a CPP or QPP retirement or disability pension.

Use the CPP contributions rates, maximums and exemptions Chart, to determine how much CPP contributions to deduct.

As an employer, you must also contribute the same amount of CPP that you deduct from your employees' remuneration. 

Employment Insurance (EI)

You have to deduct EI premiums from your employee’s insurable earnings on every dollar up to the yearly maximum.  As an employer, you must also contribute 1.4 times the EI premium withheld for each employee.

Insurable earnings include most employment in Canada under a contract of service (employer-employee relationship).

There is no age limit for deducting EI premiums.

Income tax

As an employer or payer, you are responsible for deducting income tax from the remuneration or other income you pay.  There is no age limit for deducting income tax and there is no employer contribution required.

Remitting deductions

As an employer, you have to remit the CPP contributions, the EI premiums, and income tax deducted from your employees' income, along with your share of CPP contributions and EI premiums.

Remittances for any month are due on the 15th of the following month. For example, in June any deductions from your employee paycheques, along with your employer portion, is due to the Receiver General (or CRA) on the 15th of July. Remittances are only recorded on the day they are received so you must make sure your payment arrives on or before the 15th since you are personally responsible for any late payment penalties. 

Keeping records

As an employer, you could be audited by CRA at any time. Similarly, the DF program may request copies of your payroll records at any time, so it is best to keep them well organized so you can access what you are looking for easily. It is equally important that you keep your records confidential. Things like SIN #s and payroll records are very confidential documents and should be stored in a secure location.

There are a lot of different payroll related documents that Self-Managers must keep. This is including but not limited to the following:

• Cancelled Cheques OR cheque images (unless they are submitted with your quarterly reports)
• Original Bank Statements (except those that have been forwarded with your quarterly reports)
• All receipts (unless they are submitted with your quarterly reports)
• TD1’s and TD1ON’s for all employees (for all years)
• Records of employment
• Employee time sheets
• Employee Payroll Statements (Pay Stubs)
  

  Employee Payroll Statements (xls) 54KB
• Monthly Payroll Summaries
• Any documents pertaining to the dismissal of attendants (i.e: Letters of termination, any payments in lieu of notice)
• Cash Receipts Journals
• Cash Disbursements Journals
• Bank Reconciliations for all months
• T4 Documents and back-up
• Monthly Receiver General Statements – except for those already submitted
• Quarterly WSIB Remittance forms
• Proof of insurance liability for 2,000,000
• Any other documents not listed above which relate to your participation on the Direct Funding Program

T4 Summary and T4s

At the end of every year, you must provide a T4 to each of your employees and you must submit to CRA a T4 Summary, along with a copy of each T4. For more information on T4s click here

If you Dismiss an employee

If you need to dismiss an employee, you must provide them with a Record of Employment (ROE) which the employee will use if they wish to seek Employment Insurance benefits. For more information on dismissing and the ROE click here

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